In Portland, 75 percent of market-rate apartments built between 2012-2017 are studios or one-bedrooms. There's a disparity between that and what the market demands as Millennials, the new largest generation, begin to start families — and want two- or three-bedroom residences.
Emily Anderer, the CoStar analyst who specializes in the Portland market, tracked 104 new buildings with five or more market-rate rental units that have been built since 2013, and found that 17 percent of units are two-bedroom; 5 percent are three-bedroom and zero apartment rentals have four bedrooms.
"I can tell you I pulled vacancy data going back for the past 10 years, broken out by how many bedrooms are in a unit," Anderer told the Business Tribune. "In the last two years, vacancy rates for studios has shot up from about 5.5 percent to 9 percent. That jump was the biggest for studio units: vacancy is tightest right now in two- and three-bedroom apartments, it's just over 5 percent."
CoStar conducts research on commercial real estate across the nation and in the U.K., and has more than $1 billion invested in research platforms and operations for its database.
Room vs. amenities
Portland's current housing stock includes 43 percent two-bedroom apartments and 8 percent three-bedroom.
"That's 51 percent of all available inventory," Anderer said. "Delivered since 2013, it's more like 17 percent are two-bedroom apartments. This is more recent in terms of what's happening with apartments right now."
Jared Kadry is a CoStar analyst who also specializes in the Portland market.
"It definitely has a lot to do with penciling out for the developer," Kadry said. "When you look at studios, which command a much higher rent per square foot — oftentimes in Portland more than $3 a square foot — that'll definitely pencil out better for the developer (than multi-bedroom rentals)."
The demand for small units is thought to come from Millennials who haven't settled down yet, and tech employees who don't require a lot of space. CoStar found it's a nation-wide trend in urban cores, and it applies to Portland.
"One of the trends we've noticed in Portland, especially downtown and in the Pearl and places like that, you get a lot of people — especially these tech employees or other employees that move from other states saying, 'Oh, I want to live downtown because that's what I did in my previous city,'" Kadry said. "They see nice high-end apartments, but the turnaround is really high because they find out it's nicer to live east of the river where it's walkable and you can get a discount."
Anderer also looked into types of amenities residential rental buildings are offering, and saw that pets are given preferential treatment over children — aiming for people in a certain stage of life (either before or after raising kids).
"Within our Portland system we've got 434 apartment buildings with on-site playgrounds and seven buildings with on-site daycares," Anderer said. "But with properties that have been delivered within the past five years, only 14 buildings had playgrounds and none had daycares — and what I thought was especially interesting, I looked at amenities related to pet owners and there were more apartments in our system for pets than we have specifically for children."
She found 22 apartments offering pet daycare, a pet play area or a pet washing area — almost twice the number that had playgrounds for children.
"It reaffirms my theory that people care more about their pets than their kids... I kid with people that pets get treated better than kids," Kadry joked — but for real.
Wages and renters
In the Portland metro area, the median household income is $64,000 and 39 percent of households are renters.
"Right now, the median price of a single-family residence is $314,000, and in 2012 the first time since the recession happened the home price growth rate jumped over the rent growth rate and it's been that way since 2012 until now," Anderer said. "So basically, the prices of single-family residences are increasing more rapidly than prices of market-rate apartments, but incomes are also going up by a bunch — 32 percent in the last five years (in the metro area) — so available housing to buy is getting more expensive more quickly than housing available to rent, but incomes are increasing."
The CoStar forecast shows vacancies tighter than the national average, but near-term supply pressures exist, which could weigh on vacancies in the short term. Most of Portland's available supply is in Northeast and Southeast, which are both seeing a spike in vacancies — a number of new, high-end apartment buildings are offering one or two months of free rent to entice people to live there.
"Concessions, like Park (Avenue) West offering up to three months at one point, buildings like that which are basically the highest-end building you can think of, Portland wasn't used to beforehand," Kadry said. "That's been a huge trend. That spike in vacancies for studios is attributable to turnover amidst the heaviest supply wave we've seen in Portland."
Park Avenue West, completed last year and located at 750 S.W. Ninth Ave., boasts soaring ceilings, floor-to-ceiling glass windows, stainless appliances, quartz countertops, energy-saving fixtures and a pet-friendly community. It has 15 floors of apartments beneath 13 floors of commercial offices, all above a two-floor retail base.
Its 572 square foot studios are renting for between $1,701-$2,938 a month. It does offer two-bedroom units up to 1,407 square feet — for between $4,040-$5,172 a month. Its website lists 24 vacancies from studios to two-bedrooms out of a total of 85 units, and also advertises "new low pricing on select units."
"I toured NV when it opened, they were telling me about their leasing activity and I had just come from Seattle — it's just a world of difference, but a beautiful building," Kadry said.
The NV also offers one- and two-bedroom units, townhomes and penthouses, boasting tiled bathrooms and wood grain flooring, stainless steel appliances, quartz countertops, glass subway tile back splashes, energy efficient washers and dryers and pendant lighting.
The NV's one-bedroom plus a den, a unit that measures 672 square feet, is renting for $2,000 a month. The 930-square foot, one-bedroom townhomes are renting for $2,645. Its website shows 37 vacancies, out of 284 units.
Over the next year, CoStar expects the vacancies to increase.
"Most of the development has been kind of targeted toward higher-income individuals," Kadry said. "Portland is a little bit of an anomaly. I use Seattle a lot as an example ... when you have a lot of this product, you wouldn't have high-end product filling up quickly just because there's such a wide gap of people there. That's been the case in most cities they're targeting."
Another factor is tech employees who don't make as much as tech sectors in more expensive cities — Portland has many startups and has seen a slowdown in venture capital funds.
"One of the things we've seen in Portland is the tech sector definitely has a bulk of the high-paying jobs, but compared to other cities the tech salaries aren't as high — compared to Seattle and the Bay Area," Kadry said. "Developers are revising their strategies, which is why we're seeing a lot more supply in Northeast and Southeast Portland where it's a little more feasible to target that demographic."
Maybe Portland developers should start to build more medium-sized housing, in modest-priced townhomes or other mid-density styles. After all, that's what the Millennial market demands these days.
By Jules Rogers
Reporter, The Business Tribune
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